Fighting Deflation in 18th-Century Japan

By Matthew Dalton

Sumo wrestling, samurai and origami are some of Japan’s most famous traditions. One of its most unfortunate, it turns out, is deflation.

This and other facts about Japanese monetary history are on display at the Bank of Japan’s Currency Museum. I had some down time covering the International Monetary Fund meetings in Tokyo and knew I had to see one of Tokyo’s most scintillating sites. Also, the museum is free, and I happened to be walking past it after an interview.

Alongside a collection of the notes, coins and even rice that have been used as currency at various times in Japan, is a history of Japanese monetary policy, such as it was.

The year was 1714. Arai Hakuseki, a Confucian scholar who was perhaps Japan’s first monetary policy hawk, had been handed control of the currency after the previous Shogun had gone wild debasing gold and silver coins, called Genbun, to fund the government’s budget deficit. That, of course, caused prices to soar; it’s the kind of move sure to get a modern economic policymaker disinvited from all the fancy conferences, but people didn’t quite understand how monetary policy worked backed then.

Mr. Hakuseki cut the number of coins in circulation to bring inflation under control. But he cut the money supply too much, and a debilitating period of deflation was the result, causing widespread economic turmoil, according to the museum.

Enter Japan’s first monetary policy dove, Ogyu Sorai, also a Confucian scholar. Mr. Sorai convinced the Shogun that “moderately debased” Genbun needed to be circulated to halt the deflationary trend. What happened? “In this manner, recoinages were used to achieve an appropriate circulation of money, and indeed this may be viewed as the earliest form of monetary policy in Japan,” the museum says.

Could similar steps end the current bout of Japanese deflation that has bedevilled Japanese policymakers for nearly two decades? Well, the Bank of Japan has been trying to “moderately debase” the currency for a while now by buying government debt. It hasn’t had the desired effect, and the yen is now decidedly un-debased, trading near an all-time high against the dollar.

Alas, the bank’s exhibits stop shortly after World War II, leaving one of the most interesting and troubling periods in modern economic history conspicuously unmentioned.

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